Providing useful insights and making the complex world of energy more accessible, from an experienced industry professional. A service of GSW Strategy Group, LLC.

Tuesday, January 31, 2006

Taxes vs. Projects

Earnings season is upon us, and the oil companies' 2005 results will certainly energize their critics. The top three US firms, ExxonMobil, Chevron, and ConocoPhillips, collectively earned almost $64 billion last year, up from the prior year's combined $47 billion. These remarkable figures will reinforce calls for some form of windfall tax and reduce the likelihood of derailing the "inventory tax" already under consideration. If the industry is going to make a compelling case for retaining all its profits to reinvest for the future, it must do so soon.

Returning to the windfall profit taxes of the 1970s--or some updated variant--would be a costly error, but it's harder to make that case when companies spend billions buying back their own shares. The inescapable fact is that expanding these companies' alternative energy portfolios, while simultaneously replacing their current oil and gas production, will require investments on a vast scale. A billion dollars currently buys one deepwater production platform, and the world will need scores of them in the next decade. Refineries, oil sands and gas-to-liquids plants are even pricier. The best argument against new taxes is a full slate of conventional and alternative energy projects, coupled to straightforward explanations of how they support future demand.

While I'm struck by the way this industry has been singled out for opprobrium for turning a healthy profit--in contrast to other sectors with less risk and much lower capital needs--I am convinced that a good part of this resentment flows from the inadequacy of the industry's public education efforts over the years. How many people understand what it takes to get a gallon of gasoline to the corner service station, let alone truly appreciate the difficulty of replacing even 10% of our present fossil fuel supply with renewable energy? Now, perhaps that's a failing of our schools, but it's also a huge missed opportunity for an industry that has such frequent contact with its customers.

Whether we like these companies or not, it's in the interest of everyone who drives a car, flies, or heats a home with oil or gas, that they earn a return sufficient to induce investors to keep their money there, instead of putting it all into stocks like Google. That might seem an incredible notion today, but it was a serious problem for the industry only a few years ago, when oil prices were lower. Recreating that situation now with taxes, rather than low oil prices, would guarantee a return to the underinvestment that has contributed to today's energy problems.